Modvat credit on inputs for exempted final products was inadmissible, while the excise duty demand on exempt clearances failed.

Modvat credit on inputs used to manufacture tyres and tubes cleared as exempted final products was held inadmissible, so reversal of the wrongly availed credit was upheld. The excise duty demand on those clearances was set aside because the goods fell within the exemption notification and there was no contrary material showing duty liability. Penalty was sustained on the facts, as the credit had not been reversed for exempted clearances. The order was thus modified to delete the duty demand while maintaining the credit reversal and penalty.

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Issues: (i) whether Modvat credit taken on inputs used in the manufacture of tyres and tubes cleared as exempted goods was liable to reversal; (ii) whether the demand of central excise duty on such cleared goods was sustainable; and (iii) whether the penalty imposed was justified.

Issue (i): Whether Modvat credit taken on inputs used in the manufacture of tyres and tubes cleared as exempted goods was liable to reversal.

Analysis: The tyres and tubes were cleared under the exemption notification for original equipment used in tractors of engine capacity not exceeding 1800 cc. Since the goods were exempted, credit on inputs used in their manufacture was not admissible under the rule governing denial of Modvat credit where the final product is exempt. The appellants had therefore wrongly availed the credit.

Conclusion: The reversal of Modvat credit was upheld and was against the assessee.

Issue (ii): Whether the demand of central excise duty on such cleared goods was sustainable.

Analysis: The cleared tyres and tubes were covered by the exemption notification and there was no evidence showing that duty was payable on them despite the exemption. In the absence of any contrary material, the demand could not be sustained.

Conclusion: The duty demand was set aside and was in favour of the assessee.

Issue (iii): Whether the penalty imposed was justified.

Analysis: The appellants had not reversed the wrongly availed Modvat credit on inputs used for exempted clearances, and the penalty was found to be reasonable on the facts.

Conclusion: The penalty was sustained and was against the assessee.

Final Conclusion: The order was modified by deleting the duty demand while maintaining the reversal of Modvat credit and the penalty, resulting in a partial success for the assessee.

Ratio Decidendi: Modvat credit is not admissible on inputs used in the manufacture of exempted final products, while a duty demand cannot be sustained where the clearances are covered by an applicable exemption and no contrary evidence shows duty liability.

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